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Verity&#39s view

Four years ago, I received a telephone call from one of that small but powerful clique of people who really run the life insurance industry. He asked me to meet him at one of his favourite pubs to talk off the record about something he felt was dramatically wrong. The company where he had worked for most of his adult life was being forced to the wall unnecessarily, he said, by the regulator&#39s solvency rules.

It was Bernard Brindley, until 1999 the appointed actuary of NPI, which throughout the 1990s was one of the life insurers most recommended by IFAs. He had recently left his post but was still angry at the circumstances.

Brindley had opposed moves to demutualise NPI by the new chief executive Alistair Lyons. His opponents on the board argued that its solvency was looking thin.

The free-asset ratio, used by many IFAs to assess NPI&#39s financial strength, was shrinking, making it harder to sell products. There seemed to be little spare capital above and beyond what NPI needed to meet the regulator&#39s requirements, for example,the required minimum margin which means that your assets must be at least 104 per cent of your liabilities.

Drawing numerous diagrams (and trying to prevent them getting damp with beer), he explained how this was nonsense. Free-asset ratios could be and were manipulated, as we all now know. He showed me how, if you assessed assets and liabilities on a realistic basis, NPI had enough assets to cover all its liabilities comfortably. Why should it be forced to demutualise?

Brindley had been fighting this for years, using every device to prevent the solvency regulations from putting NPI in a position where its only method of raising capital and, therefore, saving itself was to demutualise. NPI had issued a tranche of subordinated debt, not really for good business reasons but because it shored up its assets. The discount rates (the interest rates used by actuaries to work out the present value of future liabilities) were tweaked, dramatically improving its solvency position.

But NPI still had to compete. To do that, it had to continue paying decent commission to the IFAs who distributed its products, eating into its capital in that common life insurers&#39 ailment we know as new business strain. Its financial position stubbornly refused to improve.

To get capital, NPI did, of course, demutualise, selling up to the Australian AMP group. Other groups also had assets worth comfortably more than liabilities but were nevertheless still bumping up against the solvency rules. They, too, were forced to sell up. Scottish Life, Scottish Provident and, earlier, Scottish Mutual are three examples.

Brindley&#39s argument – that the solvency rules were so overly restrictive that they were forcing perfectly decent companies into a corner – were ignored back then. Who cared if a few small life ins-urers were forced to sell up?

Today, the same arguments are used by giants such as Norwich Union and Standard Life. They accept that the issuance of subordinated debt, the use of future profits as a current asset and the tweaking of discount rates may seem like artificial devices but they regard them as necessary measures to combat an unnecessary evil – the overly strict nature of solvency regulation.

Now the big boys are complaining, all of a sudden, the regulator is listening. The FSA is reviewing with-profits and is expected, we hope, to introduce a more rational solvency regime that does not unnecessarily force companies to sell shares, cut bonuses, use questionable accounting devices, demutualise, be taken over or close to new business.

Perhaps ironically, the policyholders of NPI, Scottish Provident Scottish Life et al can be glad. They were bought at high prices by big institutions such as AMP and Abbey National, which have since had to throw hundreds of millions of pounds at them just to meet the solvency standards.

But the policyholders of Equitable Life might not feel the same. The real weakness of the regime from their point of view is that it failed consistently to inform them about the financial state of the company in which they invested their savings.

Above all, that is what the new with-profits regime must do. It must acknowledge that it is the right of policyholders to know what is happening to their money and to have access to all relevant information about financial strength. That information must be public, objective and comparable – just as it is for shareholders in a public limited company.

The man in charge of the review, who aims to lead us to a brighter dawn of transparent with-profits, is David Strachan. Please, let&#39s get it right this time.

Andrew Verity is a personal finance reporter at the BBC


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Thursday, 3 April 2003 Aim: Growth by investing in small fast-growth companies Minimum investment: £3,000 Opening/closing dates: March 1, 2003/April 4, 2003 Charges: Implicit Commission: Initial 3.5% Contact:


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